Shareholder disputes in closely-held companies: Where claims fall short of oppression

In many cases, closely-held corporations entail family or personal relationships, and the breakdown of these relationships can give rise to particular difficulties. The oppression remedy is commonly pleaded in the resolution of these disputes, particularly where shareholders are also involved in the management of the company. Two recent decisions involving participants in closely-held corporate structures illustrate these issues and confirm that context is key. In each case, the court was reluctant to characterise conduct that was referable to a commercial difference in opinion or the consequence of a relationship breakdown, as oppressive, and declined to grant relief.

The law

The key statutory provisions in relation to oppressive conduct are contained in Part 2F.1 of the Corporations Act 2001 (Cth) (the Act). Under section 232 of the Act, a court may make an order under section 233 if the conduct of a company’s affairs or an act or resolution is contrary to the interests of the members as a whole, or oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members. The court’s discretion to order relief under section 233 is broad and can extend to the winding up of the company or a buy-out order. The aim must be to put an end to the oppression.^[1]

Boston v Ellena^[2]

Facts

Three sisters were the directors, and through their individual entities, the shareholders of a family company group holding commercial properties in Western Australia. Two of the sisters proposed a directors’ resolution to engage a real estate agent to advertise the group’s properties for sale. The plaintiff contended that:

• her sisters had conducted the affairs of the company group in a manner that was oppressive and contrary to sections 232 and 233 of the Act, by mismanaging the group’s business, and
• the proposed resolution authorising the advertisement of the properties for sale was oppressive.

She sought an urgent injunction to restrain the passing of the resolution. Her sisters gave an undertaking that no offer to purchase the properties would be accepted without a meeting of the directors.

Decision

The application was dismissed. While her Honour accepted that the conduct by the other two shareholders over several years was oppressive, including the failure to provide access to the group companies’ books and records, the proposed resolution did not itself constitute oppressive conduct. Her Honour found that:

• there is an established distinction between legitimate differences of opinion and oppression – engaging an agent was a management decision about which reasonable directors could hold different views, including who may be the best agent or who should instruct the agent
• there was no link between the advertisement of the group properties for sale and either diminished shareholder value or a diminution in shareholder entitlements to give rise to a prima facie case of oppression
• the evidence did not establish that the foundational understanding of the group enterprise was that the properties were never to be sold, and
• the requested injunction would have been contrary to the status quo provided for in the company’s constitution and would have elevated a minority director’s position to one of effective veto over majority decisions, as the effect of the restraint would be to prevent the company from doing what it has always been able to do – advertise its properties for sale.

Hagakure v Cassisi^[3]

Facts

Two friends jointly developed a software product over several years, culminating in the incorporation of a 50/50 company to commercialise the software. The relationship between the parties broke down following a disagreement concerning the timing of the software’s launch. The plaintiff failed to pay an invoice for the respondent’s development of the product and engaged lawyers to issue correspondence, including requesting written undertakings. In response, the respondent denied the plaintiff access to the software repository. The parties were unable to resolve their differences, resulting in a deadlock.

Decision

The application was dismissed and the parties were given an opportunity to confer as to orders, including as to whether a winding up order should be made. His Honour held that:

• the denial of access to the software repository, whilst conduct that inflamed the tensions between the parties, did not meet the statutory criteria. Viewed in context, the denial of access was one step in the saga that was the breakdown of the relationship between the parties
• the disagreement between the parties was escalated by the plaintiff’s engagement of lawyers, whose letter was described as a “declaration of hostilities”, and
• the paralysis of the company was a function of this broader deterioration, rather than the discrete act of denying access to the software. The breakdown in the relationship appeared to be irretrievable.

Key takeaways

• Context is key: Viewed in its proper context, conduct which on its face may appear oppressive, may lose that character. In Boston, when viewing the proposed resolution in context, including the foundational understanding of the parties and the undertaking given by the two sisters, the proposed resolution did not amount to oppressive conduct. In Hagakure, whilst the aggrieved party did not have to come with “clean hands”, his conduct, including the failure to pay the invoice and the engagement of lawyers, rendered the conduct of the respondent, not unfair.
• Oppression requires more than disagreement: These cases reaffirm that there is a distinction between legitimate differences of opinion and conduct which a reasonable, commercially-minded bystander would regard as unfair. In both Boston and Hagakure, the court concluded that the conduct did not surpass that threshold, despite the dysfunctional underlying relationships. The conduct was more properly characterised as a commercial disagreement, or the consequence of a relationship breakdown to which both parties contributed.